Sunday, January 27, 2013

Gavyn Davies gives an update on where monetary policy in the UK is likely
headed when Mark Carney takes over as governor of the Bank of England:

Carney rejects King and supports the Fed doves, by Gavyn Davies: Mark Carney
‘s
comments on monetary policy at Davos, though not specifically about the UK,
opened a wide gap between his thinking and that of outgoing Governor Sir Mervyn
King (see
this earlier blog). The latter expressed doubts last week about the ability
of monetary policy to boost the economy further, given his concerns about the UK
supply-side, and his related worries about the 2% inflation target.

At Davos, Mark Carney showed very little sympathy for any of this, arguing that
there is plenty of scope for monetary policy to boost the developed economies
further... Mr Carney said that it might be acceptable for inflation to exceed
the government’s 2% target for a fairly lengthy period, especially in the
context of fiscal consolidation. ... But it is not clear how this approach can
be made compatible with the Bank of England’s current mandate, which has always
been interpreted by the MPC as requiring a return to a 2% inflation target over
roughly a two year horizon. ...

Mr Carney seems to think that he can just about square his remarks yesterday
with this “flexible inflation target” mandate, but in spirit his remarks are
more in keeping with a nominal GDP target, or a twin inflation/employment
mandate of the Fed variety. If policy is to shift in this direction, which means
placing a greater weight on unemployment within a Taylor rule framework, then
many members of the MPC might prefer the government to reduce confusion by
changing the official mandate. ...

Without a change in the mandate, there is some doubt about whether the majority
of the current MPC would support Mark Carney’s approach. ...

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'Carney rejects King'

Gavyn Davies gives an update on where monetary policy in the UK is likely
headed when Mark Carney takes over as governor of the Bank of England:

Carney rejects King and supports the Fed doves, by Gavyn Davies: Mark Carney
‘s
comments on monetary policy at Davos, though not specifically about the UK,
opened a wide gap between his thinking and that of outgoing Governor Sir Mervyn
King (see
this earlier blog). The latter expressed doubts last week about the ability
of monetary policy to boost the economy further, given his concerns about the UK
supply-side, and his related worries about the 2% inflation target.

At Davos, Mark Carney showed very little sympathy for any of this, arguing that
there is plenty of scope for monetary policy to boost the developed economies
further... Mr Carney said that it might be acceptable for inflation to exceed
the government’s 2% target for a fairly lengthy period, especially in the
context of fiscal consolidation. ... But it is not clear how this approach can
be made compatible with the Bank of England’s current mandate, which has always
been interpreted by the MPC as requiring a return to a 2% inflation target over
roughly a two year horizon. ...

Mr Carney seems to think that he can just about square his remarks yesterday
with this “flexible inflation target” mandate, but in spirit his remarks are
more in keeping with a nominal GDP target, or a twin inflation/employment
mandate of the Fed variety. If policy is to shift in this direction, which means
placing a greater weight on unemployment within a Taylor rule framework, then
many members of the MPC might prefer the government to reduce confusion by
changing the official mandate. ...

Without a change in the mandate, there is some doubt about whether the majority
of the current MPC would support Mark Carney’s approach. ...